PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp.
FROM: Leonard Cross, Partner, Calderwood & Harkness LLP
DATE: February 20, 2024
RE: Preparation for IRS Appeals Conference — February 28, 2024 Penterra Pharmaceuticals Corp. IRS Transfer Pricing Examination (TY 2017–2020) C&H Matter No. 1018-00009 IRS Exam Team ID: LB&I-NE-TP-2022-00641
PRIVILEGE NOTICE: This memorandum is prepared in anticipation of the IRS Appeals conference scheduled for February 28, 2024, and is protected by the attorney-client privilege and the attorney work-product doctrine. This memorandum reflects the mental impressions, conclusions, opinions, and legal theories of counsel. It should not be disclosed to any person outside the Calderwood & Harkness LLP engagement team and authorized Penterra Pharmaceuticals Corp. personnel without the prior written approval of counsel. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
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I. Purpose and Overview
The purpose of this memorandum is to prepare you, Marcus Whitfield, for the IRS Appeals conference currently scheduled for February 28, 2024, at the IRS Appeals Office in Manhattan, New York. This memorandum sets forth the key facts, anticipated questions, recommended responses, messaging themes, ground rules, and logistical details necessary for you to perform your role effectively at the conference.
As Vice President, Global Tax of Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), you may be called upon to make statements or answer questions from Appeals Officer Noreen Castañeda regarding PPC's transfer pricing positions, the qualified cost-sharing arrangement ("CSA") with Penterra Biopharma International DAC ("PBI"), and the Company's intercompany pricing practices for tax years 2017 through 2020 (the "Years at Issue"). The conference is a critical juncture in the dispute resolution process, and your preparation is essential to advancing PPC's position.
By way of background, the IRS Large Business & International Division ("LB&I") examination of PPC's transfer pricing for the Years at Issue resulted in a Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, proposing net adjustments of $380.4 million across all four tax years. The IRS's proposed adjustments target two principal areas: (1) PBI's cost-sharing percentages under the CSA, and (2) the royalty rate applicable to the legacy IP license arrangement between PPC and PBI. PPC filed its Formal Protest on December 22, 2023, contesting these adjustments in their entirety on both factual and legal grounds. The matter was subsequently assigned to Appeals.
Appeals Officer Castañeda was assigned the case in January 2024. She has received and reviewed the Formal Protest and all accompanying exhibits (Exhibits A through E), as well as the IRS examination team's complete administrative file. It is our expectation that Officer Castañeda will have familiarized herself with the key facts and legal issues prior to the conference, though we should anticipate that she may probe certain areas in depth and may focus on issues or arguments that she finds most relevant to her hazards-of-litigation assessment.
The following individuals are expected to attend the conference:
Calderwood & Harkness LLP ("C&H"):
• Leonard Cross, Partner (lead counsel)
• Sylvia Hartwell, Counsel
• Garrett Simmons, Associate
Penterra Pharmaceuticals Corp. ("PPC"):
• Marcus Whitfield, VP, Global Tax
• Deborah Staines, General Counsel
Whitmore Valuation Group ("WVG"):
• Dr. Helena Vasquez, Managing Director (economic expert)
Internal Revenue Service:
• Noreen Castañeda, Appeals Officer
Your role at the conference is primarily as PPC's business-side witness — the individual who can speak authoritatively to the business rationale underlying PPC's transfer pricing structure, the CSA with PBI, PBI's operations, and the Company's intercompany pricing practices from a tax-department perspective. Dr. Vasquez will handle technical economic and valuation questions, including questions about the comparable uncontrolled transaction ("CUT") analysis, the comparable profits method ("CPM") / transactional net margin method ("TNMM") analysis, and the platform contribution transaction ("PCT") valuation methodology. I will handle legal arguments, including the application of the arm's-length standard under Section 482, the regulatory framework under Treasury Regulations §§ 1.482-4 and 1.482-7, and the penalty defense under Section 6662(e). The division of responsibilities among the team members is discussed further in Section III below.
This memorandum is organized as follows: Section II covers conference logistics; Section III addresses your specific role and the ground rules for the conference; Section IV sets forth the key facts you should know and be prepared to articulate; Section V provides anticipated questions and recommended responses; Section VI summarizes the key messaging themes we want to convey; Section VII outlines the mock Q&A practice session; Section VIII lists the documents you should review before the conference; Section IX provides logistical reminders; and Section X provides contact information for the team.
Please review this memorandum carefully and contact me or Sylvia Hartwell with any questions before the conference date.
II. Conference Logistics
Date and Time: Wednesday, February 28, 2024. The conference is expected to begin at 10:00 AM Eastern Time.
Location: IRS Appeals Office, Manhattan, New York. The specific street address and suite number will be confirmed by Appeals Officer Castañeda's office and circulated to the team no later than February 26, 2024. Based on prior experience, the Manhattan Appeals Office is located in the federal building in lower Manhattan, and you should plan for standard federal building security screening upon arrival.
Format: The conference will be conducted in person. Based on the standard format for IRS Appeals conferences of this nature, we anticipate that Appeals Officer Castañeda will begin with an introductory overview of the case and the issues under consideration. She will then invite the taxpayer's presentation, during which I will provide an opening statement summarizing PPC's positions. Following the taxpayer's presentation, the Appeals Officer will engage in a question-and-answer session, during which she may direct questions to any member of the taxpayer's team. You should be prepared for the possibility that the Appeals Officer may ask questions during the presentation itself, rather than waiting until the formal Q&A portion. The conference may also include a discussion of procedural next steps, including any follow-up submissions or supplemental information the Appeals Officer may request.
Pre-Conference Meeting: The full C&H team and PPC attendees will meet at 8:00 AM on the morning of February 28, 2024, at Calderwood & Harkness's New York headquarters:
Calderwood & Harkness LLP 600 Lexington Avenue New York, NY 10022
The pre-conference meeting will serve several purposes: (1) a final review of the key facts and recommended responses; (2) a mock Q&A session (described in Section VII below); (3) coordination among the team members regarding the division of responsibilities during the conference; and (4) a review of the Appeals conference document binder to ensure all materials are in order. Please plan to arrive at the C&H New York office no later than 7:50 AM to allow sufficient time for building access and security.
Document Binder: Each team member will receive a copy of the Appeals Conference Document Binder prepared by the C&H team. The binder will contain the following materials organized by tabbed section:
• Tab 1: Formal Protest (filed December 22, 2023)
• Tab 2: Exhibit A — PPC Corporate Entity Chart
• Tab 3: Exhibit B — CSA Summary and Cost-Sharing Ratio Analysis
• Tab 4: Exhibit C — Economic Analyses (CUT analysis, CPM/TNMM analysis, PCT DCF valuation)
• Tab 5: Exhibit D — PBI Substance Evidence (organizational chart, headcount data, board minutes summaries, regulatory expenditure summary, office lease documentation)
• Tab 6: Exhibit E — Penalty Protection Documentation
• Tab 7: Key Supporting Documents (selected IDR responses, PBI functional analysis, DEMPE functions matrix)
• Tab 8: Appeals Conference Presentation Slides
You should familiarize yourself with the contents of the binder during the pre-conference meeting and be able to locate key documents quickly during the conference if needed.
Duration: We anticipate the conference will last approximately 3 to 5 hours, including any breaks. You should plan to be available for the entire day, as conferences of this nature may extend beyond the anticipated time frame, and there may be additional discussion or follow-up matters to address after the formal session concludes.
III. Role Definition and Ground Rules
A. Marcus's Role at the Conference
Your role at the Appeals conference is to serve as PPC's business-side witness. Your primary objectives are as follows:
1. Demonstrate PPC's Good Faith. Appeals Officer Castañeda will be evaluating not only the technical merits of PPC's transfer pricing positions but also the Company's overall approach and credibility. Your demeanor, preparation, and willingness to engage substantively with the Appeals Officer's questions will contribute to her assessment of PPC as a cooperative taxpayer that acted in good faith.
2. Establish the Commercial Substance of PBI. One of the IRS examination team's implicit arguments is that PBI lacks sufficient substance to justify its role as the non-Americas principal. Your testimony regarding PBI's operations, personnel, decision-making authority, and commercial activities is critical to rebutting this characterization.
3. Articulate the Business Rationale for the CSA. You should be prepared to explain clearly and concisely why PPC established the CSA with PBI, effective July 1, 2012, and why the structure made sense from a business and operational perspective — not merely from a tax perspective.
4. Explain the Legacy IP Royalty Arrangement. You should be able to describe the terms of the legacy compound license, the 4.5% royalty rate, and the basis for that rate in the comparable uncontrolled transaction analysis.
5. Demonstrate Command of Key Financial Figures. While you are not expected to perform economic analyses at the conference, you should be comfortable with the key financial data points set forth in Section IV below, including PBI's revenue, headcount, cost-sharing ratios, royalty payments, and PCT payment.
6. Defer Appropriately. Where questions concern technical economic methodology (e.g., discount rates, comparable selection, statistical analysis), you should defer to Dr. Vasquez. Where questions concern legal interpretation, regulatory requirements, or penalty analysis, you should defer to me. This division of labor is important both for accuracy and for maintaining the attorney-client privilege over legal strategy discussions.
7. Project Credibility and Professionalism. You should maintain a cooperative, professional tone throughout the conference. Appeals conferences are not adversarial in the way that Tax Court proceedings are; the Appeals Officer's role is to evaluate the hazards of litigation and seek a fair resolution. A cooperative demeanor is both appropriate and strategically advantageous.
B. Ground Rules for the Conference
The following ground rules must be strictly observed during the conference. We will review these again during the pre-conference meeting, but please internalize them in advance:
1. Do not volunteer information beyond what is asked. Answer questions directly and concisely. If the Appeals Officer asks a narrow question, provide a narrow answer. Do not offer additional context, qualifications, or related information unless specifically asked to elaborate. Volunteering information creates risk — it can open new lines of inquiry, introduce facts that are not helpful to our position, or create inconsistencies with other evidence in the record.
2. If you are unsure of an answer, say so. If you are asked a question and you are not certain of the precise answer — whether it concerns a specific date, dollar amount, headcount figure, or factual detail — you should state clearly that you would need to confirm that information and that counsel can follow up in writing. Do not guess. Do not approximate unless you clearly qualify the figure as an approximation. Inaccurate statements, even if unintentional, can undermine PPC's credibility.
3. Do not speculate about IRS motives or criticize the examining agents. You should not offer any opinion about why the IRS examination team reached the conclusions it reached, whether the examining agents acted in good faith, or whether you believe the examination was conducted properly. Specifically, do not make any negative or critical comments about Supervisory Revenue Agent Gerald Meskill, Lead Revenue Agent Patricia Dunleavy, IRS Economist Dr. Alan Washburne, or Chief Counsel Attorney-Advisor Franklin Rosario. The Appeals Officer may have a working relationship with these individuals, and criticism of the examination team will not advance PPC's position.
4. Do not discuss settlement parameters. Under no circumstances should you discuss PPC's settlement authority, target settlement range, willingness to concede on any particular adjustment, or any dollar figure associated with a potential resolution. Settlement discussions are exclusively within my domain as lead counsel. If the Appeals Officer asks you a question that touches on PPC's settlement position, you should pause and look to me, and I will respond.
5. Do not reference internal strategy discussions. You must not disclose or reference any internal C&H strategy discussions, the hazards-of-litigation analysis, any settlement authority memorandum, or any other privileged communications between PPC and C&H. These materials are protected by the attorney-client privilege and the attorney work-product doctrine, and any disclosure — even an inadvertent or partial disclosure — could jeopardize those protections.
6. Do not discuss certain third parties or topics. You should not discuss any communications or matters involving Crestfield & Associates (beyond the fact of their engagement for transfer pricing documentation), Ridgeview Capital Management, Hargrove National Bank, or any SEC disclosure considerations. If any of these topics arise, defer to counsel.
7. If asked about FIN 48 reserves or financial statement impact, defer to counsel. Questions about PPC's uncertain tax position reserves under ASC 740-10 (formerly FIN 48), the financial statement impact of the proposed adjustments, or any related financial reporting matters should be redirected to me. These topics implicate privileged analyses and are not appropriate subjects for discussion at the Appeals conference.
8. Look to counsel before responding to unexpected questions. If Appeals Officer Castañeda asks a question that you believe falls outside your role, that touches on a sensitive area, or that you are uncertain about, pause and look to me or to Sylvia Hartwell before responding. This pause is natural and expected in an Appeals conference — the Appeals Officer will understand that the taxpayer's representatives coordinate their responses. Do not feel pressured to provide an immediate answer to every question.
9. Do not commit to any follow-up actions. If the Appeals Officer requests additional documents, information, or analysis during the conference, do not agree to a specific timeline or commitment. I will handle all commitments for follow-up submissions. You may acknowledge that the information exists or can be obtained, but the timing and scope of any submission will be determined by counsel.
IV. Key Facts to Know and Articulate
This section sets forth the key facts that you should know thoroughly and be prepared to articulate at the conference. You should be comfortable discussing these facts from memory, though you will have the Appeals Conference Document Binder available for reference if needed. Each subsection below corresponds to a major factual area that may arise during the conference.
A. PPC Corporate Overview
Penterra Pharmaceuticals Corp. ("PPC") is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA. PPC is headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. The Company's Employer Identification Number is 22-3741856, and its fiscal year ends on December 31.
PPC is a specialty pharmaceutical and biotechnology company focused on three core therapeutic areas: oncology, immunology, and rare-disease therapeutics. The Company's product portfolio includes both marketed products and a pipeline of clinical-stage development candidates.
The Company's senior leadership during the Years at Issue included:
• Catherine Falk — Chief Executive Officer
• Rajesh Iyer — Chief Financial Officer
• Deborah Staines — General Counsel
• Marcus Whitfield — Vice President, Global Tax
For fiscal year 2020, PPC reported total revenue of approximately $6.82 billion and pre-tax income of approximately $1.47 billion. As of December 31, 2020, PPC employed approximately 14,500 employees globally, including employees of its subsidiaries.
You should be comfortable stating these overview facts if asked to describe the Company. Keep the description straightforward and factual. If the Appeals Officer asks about PPC's business in general terms, you can describe it as a mid-to-large-cap specialty pharmaceutical company with a diversified portfolio of marketed products and a robust R&D pipeline, primarily focused on oncology, immunology, and rare-disease therapeutics.
B. Corporate Structure
The relevant corporate structure for purposes of the transfer pricing issues at Appeals is as follows:
PPC (U.S. parent, Delaware) is the ultimate parent corporation and is the entity under examination. PPC directly owns Penterra Holdings Luxembourg S.à r.l. ("PHL"), an intermediate holding company organized under the laws of Luxembourg. PHL is a société à responsabilité limitée registered with the Luxembourg Registre de Commerce et des Sociétés under number B 168452, with its registered office at 14, rue Aldringen, L-1118 Luxembourg. PHL is classified as a disregarded entity for U.S. federal income tax purposes and is therefore treated as a branch of PPC.
PHL, in turn, directly owns 100% of the share capital of Penterra Biopharma International DAC ("PBI"), an Irish designated activity company with its principal offices at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI's Irish Tax Reference Number is 3218764T. PBI is the IP-holding and principal company for PPC's non-Americas commercial operations, and it is the counterparty to both the CSA and the legacy IP royalty arrangement.
PBI, in turn, directly owns 100% of Penterra Manufacturing Ireland Ltd. ("PMI"), an Irish contract manufacturing entity located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI is registered with the Irish Companies Registration Office under CRO Number 512347. PMI operates as a contract manufacturer for PBI under a cost-plus arrangement at an 8% markup. As of 2020, PMI employed approximately 620 employees engaged in manufacturing, quality assurance, and supply chain logistics.
The entity chart is set forth as Exhibit A to the Formal Protest and will be included in your Appeals Conference Document Binder at Tab 2. You should be familiar with this chart and able to describe the ownership chain and the role of each entity clearly and without hesitation.
C. PBI — Business Rationale and Substance
PBI was incorporated on March 15, 2012, and the CSA between PPC and PBI became effective on July 1, 2012. The establishment of PBI and the entry into the CSA were part of a broader strategic initiative to create a dedicated non-Americas commercial platform with direct responsibility for the commercialization of PPC products outside the Americas region.
The business rationale for establishing PBI in Ireland was driven by several factors, which you should be prepared to articulate clearly:
1. Operational Centralization: PBI was established to serve as the principal for PPC's non-Americas (EMEA and APAC) commercialization activities, providing a single point of accountability for regulatory strategy, commercial planning, pricing, distribution partner management, and supply chain coordination across non-Americas markets.
2. Ireland's Pharmaceutical Infrastructure: Ireland has one of Europe's most established pharmaceutical and biopharmaceutical industries, with a deep pool of experienced regulatory, medical affairs, and commercial talent. PPC already had a significant manufacturing presence in Ireland through PMI in Cork, and the addition of PBI's commercial headquarters in Dublin leveraged the existing Irish operational footprint.
3. EU Membership and Market Access: Ireland's membership in the European Union provided PBI with direct access to the EU regulatory framework, including the European Medicines Agency ("EMA") centralized procedure, and facilitated trade and distribution across EU member states.
4. Proximity to Key Markets: Dublin's geographic location and connectivity to EMEA markets made it a logical hub for a non-Americas commercial organization.
5. Talent Availability: Ireland offered access to a multilingual, highly educated workforce with specific expertise in pharmaceutical regulatory affairs, pharmacovigilance, medical affairs, and commercial operations.
You should emphasize that the decision to establish PBI in Ireland was driven by operational and commercial needs, not solely by tax considerations. While Ireland's corporate tax environment was one factor among many, the primary motivations were the operational advantages described above.
PBI's Managing Director during the Years at Issue was Aidan Naughton, who was responsible for the overall management and strategic direction of PBI's non-Americas commercial operations. Naughton reported to PPC's Chief Commercial Officer but exercised independent decision-making authority over PBI's core commercial functions.
PBI's headcount grew significantly from its inception:
• 2012 (inception): 52 employees
• 2017: approximately 140 employees
• 2018: approximately 155 employees
• 2019: approximately 170 employees
• 2020: 185 employees
PBI's workforce includes personnel across several functional areas: regulatory affairs, medical affairs, commercial strategy, supply chain management, finance and treasury, and corporate functions (legal, HR, IT). The growth in headcount from 52 at inception to 185 by the end of 2020 reflects the maturation of PBI's operations and the expansion of PPC's non-Americas product portfolio.
PBI's office consists of approximately 18,000 square feet of leased space at Sandyford Business Park in Dublin, Ireland. The office houses PBI's management team, functional staff, and supporting infrastructure. PBI maintains its own IT systems and communications infrastructure.
During the Years at Issue (2017–2020), PBI's board of directors held a total of 42 board meetings in Dublin — consisting of quarterly meetings and special sessions as needed. All board meetings were chaired by Managing Director Aidan Naughton and addressed key commercial and strategic decisions, including product launch strategies, pricing decisions, distribution partner appointments, and regulatory submissions. The board minutes for these 42 meetings were produced in response to IDRs during the examination and are summarized in the PBI Board Minutes Summaries included in the document binder.
PBI incurred cumulative regulatory expenditures of €47.2 million during 2017–2020 in connection with regulatory submissions across 68 country markets in EMEA and APAC. These expenditures covered the full spectrum of regulatory activities, including initial marketing authorization applications, variations, renewals, pharmacovigilance activities, and post-marketing commitments. PBI's regulatory team managed these submissions directly, working with in-country regulatory consultants as needed.
PBI made independent pricing decisions across all 68 non-Americas markets, taking into account local market conditions, competitive dynamics, reimbursement frameworks, and regulatory pricing requirements. Pricing decisions were made by PBI's commercial team and approved by PBI's management, without requiring approval from PPC's U.S. headquarters.
PBI bore market risk for non-Americas territories. PBI purchased finished goods from PMI under the cost-plus contract manufacturing arrangement and sold products to third-party distributors and customers at prices set by PBI. PBI's profitability was therefore a function of its pricing decisions, commercial execution, and cost management — not a guaranteed return.
PBI maintained local banking with Glenmore Bank Ireland plc and operated independent treasury functions, including cash management, intercompany settlement, and foreign exchange hedging for its non-Euro currency exposures.
For fiscal year 2020, PBI reported revenue of €2.14 billion and pre-tax income of €1.06 billion.
These facts are central to PPC's position. The IRS examination team's adjustments implicitly rest on the premise that PBI is not a substantive entity deserving of the income attributed to it under the CSA and the legacy royalty arrangement. Your ability to speak credibly and specifically about PBI's operations, personnel, decision-making processes, and commercial activities is therefore among the most important contributions you can make at the conference.
D. The Cost-Sharing Arrangement
The CSA between PPC and PBI became effective on July 1, 2012. Under the CSA, PBI acquired the right to develop and exploit PPC's pharmaceutical IP portfolio outside the Americas region (i.e., in EMEA and APAC territories) in exchange for two forms of consideration:
(a) A platform contribution transaction ("PCT") payment of $312 million, paid by PBI to PPC as a lump sum on July 1, 2012, representing fair consideration for PBI's acquisition of rights to PPC's pre-existing IP portfolio (including approved and clinical-stage pharmaceutical compounds) for non-Americas exploitation; and
(b) Ongoing cost-sharing payments by PBI, proportional to PBI's share of reasonably anticipated benefits ("RAB"), covering PBI's portion of PPC's qualified research and development costs.
The cost-sharing ratios for the Years at Issue were determined based on projected revenue splits between Americas and non-Americas territories, consistent with the RAB methodology prescribed by Treasury Regulations § 1.482-7. The ratios, total qualified R&D costs, and resulting PBI cost-sharing payments were as follows:
The RAB shares were calculated using projected Americas versus non-Americas revenue splits for each year. These projections were prepared annually using bottoms-up market forecasts by product and by territory, incorporating market data from commercial planning teams, Kestrel Industries / Tidewater Holdings data, and management estimates. The projections were reviewed and approved by PPC's finance and tax departments. The increase in PBI's cost-sharing percentage from 38.2% in 2017 to 42.7% in 2020 reflects the growing proportion of non-Americas revenue relative to Americas revenue, driven primarily by the market expansion of Veritaxol and Imvara in EMEA and APAC territories.
The methodology for determining the cost-sharing ratios was reasonable, was updated annually to reflect current market data and projections, and complied with the requirements of Treasury Regulations § 1.482-7.
E. The Legacy IP Royalty Arrangement
Separately from the CSA, PBI licensed certain pre-2012 legacy compounds from PPC under a license agreement providing for a royalty rate of 4.5% of net sales for non-Americas territories. These legacy compounds were products that had been developed and commercialized by PPC prior to PBI's establishment and the inception of the CSA. The CSA governed the cost-sharing of new R&D, while the legacy license governed PBI's use of the pre-existing IP for legacy compounds in non-Americas markets.
Non-Americas net sales of legacy compounds and the resulting royalty payments for the Years at Issue were as follows:
The declining trajectory of legacy compound sales — from $814.6 million in 2017 to $624.1 million in 2020 — reflects the natural product lifecycle of mature pharmaceutical compounds facing generic competition, formulary exclusions, and market erosion. This declining trajectory is relevant to the appropriate arm's-length royalty rate, as the comparables analysis should reflect the risk and return profile associated with mature, declining-revenue products.
The 4.5% royalty rate was established based on a benchmarking analysis of comparable uncontrolled pharmaceutical license agreements for mature compounds with similar therapeutic profiles, revenue trajectories, and risk characteristics. The rate was set contemporaneously with the license agreement and was documented by Crestfield & Associates as part of PPC's transfer pricing documentation.
F. Key Products
You should be familiar with PPC's three principal products and their global and non-Americas revenue profiles:
Veritaxol (oncology — PPC's blockbuster product):
• 2020 global net sales: $3.12 billion
• 2020 non-Americas net sales: $1.34 billion (approximately 43% of global sales)
• Veritaxol is PPC's largest product by revenue and is a key driver of non-Americas growth
Imvara (immunology):
• 2020 global net sales: $1.87 billion
• 2020 non-Americas net sales: $0.79 billion (approximately 42% of global sales)
• Imvara has experienced strong uptake in European markets, particularly in the UK, Germany, and France
Cerulon (rare disease):
• 2020 global net sales: $0.62 billion
• 2020 non-Americas net sales: $0.28 billion (approximately 45% of global sales)
• Cerulon addresses a significant unmet medical need in rare-disease populations and has a premium pricing profile
These three products represent the core of PPC's marketed portfolio during the Years at Issue. The non-Americas revenue share of approximately 42%–45% across these products is consistent with PBI's cost-sharing ratios under the CSA and supports the reasonableness of the RAB projections.
G. Transfer Pricing Documentation
PPC maintained contemporaneous transfer pricing documentation for all four Years at Issue (2017, 2018, 2019, and 2020). The documentation was prepared by Crestfield & Associates LLP, PPC's independent transfer pricing advisory firm, under the direction of engagement partner Martin Ogilvy and transfer pricing partner Susan Lam.
The transfer pricing documentation was prepared in compliance with the penalty-protection standards set forth in IRC § 6662(e) and established the arm's-length nature of PPC's intercompany transactions, including:
• The CSA cost-sharing methodology under Treasury Regulations § 1.482-7, including the RAB analysis and the PCT valuation;
• The legacy IP royalty rate under Treasury Regulations § 1.482-4, including the CUT benchmarking analysis; and
• The contract manufacturing arrangement between PBI and PMI under a cost-plus methodology.
The existence of contemporaneous documentation prepared by qualified professionals is a key element of PPC's penalty defense, as discussed further in Section V.F below.
H. The IRS Examination — Key Timeline
You should be familiar with the key dates and events in the IRS examination:
The IRS examination team consisted of:
• Gerald Meskill — Supervisory Revenue Agent
• Patricia Dunleavy — Lead Revenue Agent
• Dr. Alan Washburne — IRS Economist
• Franklin Rosario — Chief Counsel Attorney-Advisor
The examination team was identified as LB&I-NE-TP-2022-00641 (Large Business & International, Northeast, Transfer Pricing).
During the examination, PPC cooperated fully, responding to all 47 IDRs and providing extensive documentation, including functional analyses, intercompany agreements, board minutes, personnel information, financial data, and economic analyses. This record of cooperation is relevant both to PPC's credibility at Appeals and to the penalty defense.
I. IRS's Proposed Adjustments — Know the Numbers
You should be thoroughly familiar with the specific adjustments proposed by the IRS in the NOPA. The proposed adjustments fall into two categories:
1. CSA Cost-Sharing Ratio Adjustments
The IRS proposed increasing PBI's cost-sharing percentage by 8 to 12 percentage points for each of the Years at Issue. The IRS's position is that PBI's RAB shares should have been higher because, in the IRS's view, the non-Americas revenue projections used by PPC understated PBI's share of total benefits. The specific adjustments are as follows:
2. Royalty Rate Adjustments
The IRS proposed increasing the legacy IP royalty rate from PPC's reported rate of 4.5% to a rate of 11.0% of non-Americas net sales for legacy compounds. The IRS's position is based on its own set of comparable license agreements, which PPC believes are not appropriate comparables. The specific adjustments are as follows:
3. Correlative Offset and Net Adjustment
The IRS allowed a correlative offset of −$42.65 million to account for the corresponding reduction in PBI's income (and therefore the reduction in royalties and cost-sharing payments flowing in the other direction).
The net proposed adjustment across all four years is:
$235.01M (CSA) + $188.04M (royalty) − $42.65M (offset) = $380.40 million
4. Proposed Penalty
The IRS has also proposed a 20% substantial valuation misstatement penalty under IRC § 6662(e). The estimated penalty exposure is approximately:
$380.4M × 21% (blended effective rate) × 20% ≈ $15.98 million
You should be comfortable reciting the net proposed adjustment of $380.4 million and the two major categories of adjustment (cost-sharing ratio and royalty rate). You do not need to recite every line item from memory, but you should have a firm grasp of the magnitude of each category and the IRS's general rationale for each adjustment.
V. Anticipated Questions and Recommended Responses
This section sets forth the questions we anticipate Appeals Officer Castañeda may ask during the conference, organized by topic area, together with recommended responses. You should review these carefully and practice delivering the responses in a natural, conversational manner during the mock Q&A session on the morning of the conference. The recommended responses are not scripts to be recited verbatim; rather, they represent the substance and tone of what you should convey. Use your own words, but cover the key points identified in each response.
A. Questions About PBI's Business Purpose and Substance
Appeals Officer Castañeda is likely to probe PBI's substance and business rationale in depth. The IRS examination team's adjustments implicitly rest on the theory that PBI's income should be higher than reported (i.e., that more income should be allocated to PPC), which in turn may reflect a view that PBI is entitled to less residual profit than PPC's transfer pricing methodology assigns to it. Demonstrating PBI's genuine operational substance is critical to undermining this theory.
Q1: Why was PBI established in Ireland?
Recommended Response: PBI was established in 2012 to serve as the principal for PPC's non-Americas commercial operations. Ireland was chosen because of its well-established pharmaceutical infrastructure, its access to EU and EMEA markets, the availability of skilled regulatory and commercial talent with deep pharmaceutical industry experience, Ireland's EU membership which facilitated regulatory submissions through the EMA centralized procedure and trade across EU member states, and the existing manufacturing presence through PMI in Cork. The decision was driven by operational and commercial needs — we needed a dedicated commercial organization closer to our key non-Americas markets, with the expertise and authority to manage regulatory strategy, pricing, distribution, and supply chain across 68 country markets. The tax environment was one factor among many, but the primary motivations were operational.
Q2: What functions does PBI actually perform?
Recommended Response: PBI employs 185 people in Dublin as of the end of 2020, up from 52 at its inception in 2012. PBI's workforce includes personnel across regulatory affairs, medical affairs, commercial strategy, supply chain management, and corporate functions including finance, legal, HR, and IT. PBI manages regulatory submissions across 68 country markets in EMEA and APAC, makes independent pricing and market-entry decisions, selects and manages distribution partners, and oversees contract manufacturing through PMI in Cork. PBI held 42 board meetings in Dublin during the 2017–2020 period, which were quarterly meetings plus special sessions as needed. All of those meetings were chaired by Managing Director Aidan Naughton and covered key commercial and strategic decisions, including product launch strategies, pricing decisions, distribution partner appointments, and regulatory submissions. The minutes of those meetings were produced during the examination.
Q3: Does PBI have its own office space and infrastructure?
Recommended Response: Yes. PBI leases approximately 18,000 square feet of office space at Sandyford Business Park in Dublin, which is a well-known commercial hub in the Dublin area. PBI maintains its own IT systems and communications infrastructure, and it conducts its banking through Glenmore Bank Ireland plc with independent treasury operations, including cash management and foreign exchange hedging.
Q4: Who makes key commercial decisions for non-Americas markets?
Recommended Response: Aidan Naughton, PBI's Managing Director, and his management team make the key commercial decisions for non-Americas territories. This includes decisions on pricing, market entry timing, distribution partner selection and management, regulatory strategy, and commercial planning. These decisions are documented in PBI's board minutes and internal decision memoranda, all of which were produced in response to IDRs during the examination.
Q5: Does PPC in the U.S. actually control PBI's commercial operations?
Recommended Response: No. While PPC provides certain shared services to PBI — as would be expected in any multinational pharmaceutical organization — and while there is coordination between PPC's U.S.-based R&D organization and PBI's commercial activities, PBI exercises independent decision-making authority over non-Americas commercialization. PBI's management team, led by Aidan Naughton, makes the commercial decisions for non-Americas markets, assumes market risk for those territories, and is accountable for PBI's financial performance. PPC's board of directors and senior management set overall corporate strategy, but the day-to-day commercial decisions for non-Americas markets are made by PBI's team in Dublin.
Q6: The IRS has raised the DEMPE framework — how would you characterize PBI's role in Development, Enhancement, Maintenance, Protection, and Exploitation of the intangible assets?
Recommended Response: I would defer to counsel for the legal characterization of the DEMPE framework, but I can speak to PBI's activities in each of those functional areas. PBI directly performs exploitation functions — it commercializes PPC's products across 68 non-Americas markets, managing the entire go-to-market process. PBI performs enhancement functions through its market development activities, medical affairs programs, lifecycle management initiatives, and commercial strategy work that builds brand value and market share in non-Americas territories. PBI performs maintenance functions through its regulatory compliance activities across those 68 markets, which required cumulative regulatory expenditures of €47.2 million during 2017–2020. PBI performs protection functions by coordinating IP enforcement activities in non-Americas jurisdictions. And development is shared through the CSA, with PBI funding its proportionate share — 38.2% to 42.7% — of PPC's qualified R&D costs during the years at issue.
B. Questions About the Cost-Sharing Arrangement
Q7: How were PBI's cost-sharing percentages determined?
Recommended Response: PBI's cost-sharing percentages were based on reasonably anticipated benefits, which were measured using projected revenue splits between Americas and non-Americas territories. These projections were prepared annually using bottoms-up market forecasts by product and by territory. The forecasts incorporated commercial planning data, market research, Tidewater Holdings market data, and management estimates. The projections were reviewed and approved by PPC's finance and tax departments each year. The methodology was consistent with the requirements of Treasury Regulations § 1.482-7 and was documented contemporaneously by Crestfield & Associates.
Q8: Why did PBI's cost-sharing percentage increase from 38.2% in 2017 to 42.7% in 2020?
Recommended Response: The increase reflected the growing proportion of non-Americas revenue relative to Americas revenue over the period. This trend was driven primarily by the market expansion of Veritaxol and Imvara in EMEA and APAC territories, where those products were gaining market share and expanding into new geographic markets. As non-Americas markets matured and PBI's commercial execution drove revenue growth in those territories, PBI's reasonably anticipated benefits grew as a share of total worldwide benefits, which appropriately increased PBI's cost-sharing contribution. The projections tracked actual revenue trends, and the year-over-year increases were consistent with observable market dynamics.
Q9: How was the $312 million PCT payment determined?
Recommended Response: The PCT payment was determined using a discounted cash flow analysis under the income method, which valued the pre-existing IP portfolio — primarily clinical-stage and approved oncology compounds — as of July 1, 2012, the effective date of the CSA. The valuation used a weighted average cost of capital of 9.8%, which reflected the risk profile of the IP assets being transferred and the pharmaceutical industry risk characteristics. The resulting $312 million fell within the arm's-length range of $278 million to $361 million. For the details of the valuation methodology, including the specific assumptions, projections, and discount rate analysis, I would defer to Dr. Vasquez, who can speak to the economic analysis in detail.
Q10: The IRS values the PCT at $852 million — how do you respond?
Recommended Response: I would defer the substantive economic rebuttal to Dr. Vasquez and the legal argument to Mr. Cross. What I can say is that PPC believes the IRS's valuation used an inappropriately low discount rate of 7.2% compared to our 9.8%, and employed overly optimistic revenue projections that did not reflect the risk profile of the assets as of the valuation date. The effect of a lower discount rate and higher projected revenues is to inflate the present value of the IP, which is what produced the IRS's $852 million figure. PPC's $312 million payment was based on a contemporaneous valuation analysis that we believe was reasonable and within the arm's-length range. Dr. Vasquez can walk through the specific differences between the two valuations.
C. Questions About the Legacy IP Royalty Rate
Q11: How was the 4.5% royalty rate established?
Recommended Response: The 4.5% royalty rate was set based on a benchmarking analysis of comparable uncontrolled pharmaceutical license agreements for mature compounds with similar therapeutic profiles, revenue characteristics, and risk profiles. The analysis identified license agreements between unrelated parties involving similar types of pharmaceutical IP, and the 4.5% rate was consistent with the range observed in those comparable transactions. The rate was established contemporaneously with the license agreement and was documented by Crestfield & Associates as part of PPC's transfer pricing documentation.
Q12: The IRS says the rate should be 11.0% — why is PPC's rate lower?
Recommended Response: For the detailed economic analysis, I would defer to Dr. Vasquez. What I can tell you is that our independent economic expert, Dr. Vasquez of Whitmore Valuation Group, conducted a CUT analysis that identified 14 comparable license agreements. The interquartile range of those 14 comparables was 3.1% to 6.8%, with a median of 4.4%. PPC's 4.5% royalty rate is essentially at the median of the comparable data — it is squarely in the middle of the arm's-length range. The IRS's proposed 11.0% rate falls well above the upper end of the interquartile range of the comparable data. We believe the difference is attributable to the IRS's use of comparables that are not sufficiently similar to PPC's legacy compound license, but Dr. Vasquez can address that in more detail.
Q13: Are the legacy compounds declining in sales?
Recommended Response: Yes. Non-Americas net sales of legacy compounds declined from $814.6 million in 2017 to $624.1 million in 2020. This decline reflects the natural product lifecycle of mature pharmaceutical compounds — these are products that were developed before 2012 and are now facing generic competition, formulary exclusions, and market erosion in many territories. The declining revenue trajectory is an important characteristic of these legacy compounds and is relevant to the appropriate arm's-length royalty rate, because the comparables analysis should reflect the risk-return profile of mature, declining-revenue products rather than high-growth or newly launched products.
D. Questions About Transfer Pricing Documentation and Compliance